Send me a pm, I'll send you a document I wrote up on this.
If you have access to an HSA, use it. Max it out.
529 should be your absolute last savings vehicle for a number of reasons. Even for your kids college fund, it shouldn't come before your retirement accounts. There are ways to get it out of most retirement accounts, especially Roth accounts (including backdoor conversions), so unless you've maxed out both you and your wife's iras, don't consider it.
Here is an abridged version of the document I have written up:
- 401k – Employer-provided defined contribution plan (403b is included in this as well – same rules for any conversion at our level).
- 2020 limit is $19,500 for those under 50. If you’re over 50, there is a catchup provision that lets you contribute another $6.5k.
- This is open to anybody that has it through their employer. There are income limitations for highly compensated employees, but that is close to $300k – well above my paygrade
- Traditionally this will be a pre-tax option, but I’ve now had a Roth (after tax) option for ¾ employers I’ve worked for. Unlike a Roth IRA, there are no income limitations (outside of the highly compensated employee limitations) for contributing to the Roth.
- Often have a match. In my case, the match goes into whatever account I’m saving to – Roth or Traditional
- Usually you have limited fund options that you can pick, determined by your employer. Most of them are some sort of target date fund.
- IRA – Individual Retirement Plan. You do this on your own.
- 2020 limit is $6,000, with an additional $1,000 catchup if you’re over 50
- Can be Roth or Traditional, or both, but total contribution limit is $6k
- Contributions to the Roth IRA can be distributed without penalty after 5 years.
- Depending on the institution you hold it at, it can be in stocks, bonds, mutual funds, etc. For instance, I have one with Vanguard that is all in VTSAX and another with Fidelity that is in individual stocks.
- HSA – Health Savings Account, offered with some health insurance plans
- $3,550 limit for an individual and $7,100 for a family. As far as I know, it is all pre-tax. You can have it in cash, or in stocks/bonds/mutual funds (i.e. I manage mine through TD Ameritrade)
- It is the BEST retirement savings account available. Why? Because you can reduce your income with the pre-tax, enjoy tax free growth, but also get tax free distributions – IF you plan it right
- Designed for health expenses – eyeglasses, dental, doctor visits, hospital visits, prescription meds, along with a bunch of other stuff. The idea is that you use it to pay for those things as they occur, great! That was tax free. But there is currently no expiration date to those distributions. So if I pay for medical bills in 2020 for $5,000, I can pay for them in cash, keep all the receipts (and digital copies too), and in 2025 say that something happens and I need $5k quick – I can then use the receipts from 2020 to get a $5,000 distribution. I doubt this loophole gets fixed, since it is probably a very small user group using it. The contribution wasn’t taxed, the growth wasn’t taxed, the distribution wasn’t taxed. And if you don’t use the loophole and just take it now, it is still a huge tax advantage.
- After you turn 65, it acts like a traditional IRA. So the distribution will be taxed as income, but you can take it for anything, even if it isn’t health related
- Taxable Brokerage account
- Buy stocks and mutual funds. Using already taxed income, any growth will be taxed as income for holdings under a year and 15% for over a year.
There are also other options but the main ones that most people will have/need are the 401k, IRA, HAS, and taxable brokerage accounts. With that, I present the world famous mtn savings order (I probably lifted this from Mr Money Mustache or ProDarwin or dCulberson here) (life insurance is not counted in this as I view it as an expense, not savings):
- Emergency fund to your satisfaction. Could be $1,000 cash, could be $100,000 cash, depends on your station in life
- 401k up to employer match
- Max HSA
- Pay off any debts with high interest rates (~8% and greater?)
- Depending on which has the lower fees
- Max ROTH 401k*
- Max ROTH IRA*
- Max traditional 401k if Roth 401k is not offered
- Pay off debts with low interest rates (above 3%, below my 3rd point)
- Invest in taxable account, or your house
- Fishing boats, guitars, cars, tools, stereos,
- Pay off extremely low interest rate loans.
*You can go either way with the Roth vs. Traditional, but I believe that taxes will only go up in the future, even the 22% and 24% tax brackets are probably lower than what I think we’ll see in the future (I could be completely wrong). For most people, I think the Roth is the better option, or traditional until your taxable income drops a tax bracket… but as always, do the math for yourself.
For 95% of people, the 401k/403b, IRA, and HSA should be invested in an SP500 or total stock market index fund. It is the simple button, and more often than not, the best bet. VTSAX.
For anyone who is trying to figure this stuff out and says “I can’t save anywhere close to that on my salary”… well, I’d challenge them by looking at their daily expenditures. A penny saved is more than a penny earned. The ubiquitous coffee example:
- Let’s say that you spend $2 on a coffee, 250 days a year. $500 a year in coffee. For a 25 year old planning to retire at 67, that means that they need to save $54.20 a year to be in coffee for the rest of their life after retirement. So their annual cost for coffee is $554.20.
- Now let’s say that they kick the Starbucks habit, and brew it at home using Folgers. That cup of coffee is going to cost, at most, about $0.40. Annual cost is about $100, and they'll need to save about $10.84 annually to be in coffee for the rest of their life. So their annual cost is $110.84.
- Seems pretty simple that the savings is $433.36 a year, right? Well, yeah... But the point here that is missed is that you aren't spending that this year, and you aren't spending it EVER. So not only are you spending less, you NEED less. So you have more, but need less. If you invest that $433.36 every year from 25 to 67, when you retire you have an extra $100k, and an extra $4,000 a year to buy... Well, coffee, I guess. But you don't need that coffee, so why not a couple of guided fishing trips, every year of your retirement? Just from switching from Starbucks to Folgers.
Obviously not everyone gets coffee every day and there are often other things that get in the way (medical debt, student loans, rent that is out of control, etc.), but do a pull of every dollar you’ve spent using your credit card or debit card over the last year. How much of it was necessary?
